Oil markets brace for prolonged geopolitical uncertainty

Key takeaways:

• The unpredictable endgame of the conflict means oil markets should brace for continued volatility, particularly as disruption in the Strait of Hormuz combines with wider geopolitical tensions across the Middle East and the ongoing war in Ukraine.

• Despite oil crossing the psychological threshold of $100, the global economy and energy markets have demonstrated greater resilience, reducing the economic pressure that might otherwise encourage a faster political resolution to the conflict.

• Prices in the high $90s or above $100 should not be viewed as establishing a new floor, as they remain heavily driven by geopolitics and could move sharply in either direction as political developments change.

• A significant geopolitical risk premium remains embedded in oil prices, while uncertainty surrounding non OECD inventories, particularly in China, makes it difficult to assess global stock levels with confidence.

• Iran may be betting that prolonging the conflict until closer to the US midterms will strengthen its negotiating position, but that calculation could prove wrong as President Trump is not seeking reelection and may be unwilling to make concessions that undermine his geopolitical legacy.